Commodity Scams: Barclays, Goldman & JP Morgan Under Fire

JP Morgan Chase is expected to announce over $600 million in penalties and repayments for allegedly cheating customers in energy markets in California and Michigan. This just after Barclays bank paid out $470 million for manipulating electricity rates. Now Goldman Sachs is under scrutiny for possibly manipulating aluminum prices.

Commodity market scams – from energy to metals – are notoriously hard to track partly because they involve huge players dealing with each other with little outside oversight. For example, consumers are outraged when they get hefty electricity bills but it often take a lot of time for regulators to prove that they deliberately manipulated the markets.

Here’s a simple illustration how some of these scams work. Buying or hoarding large quantities of commodities is not illegal but it has the effect of driving prices up while dumping purchases has the opposite effect. Combine the two practices skilfully, it becomes easy to make a quick profit when prices are manipulated to change suddenly. (Say you buy a million shares of something at $10 and then another million at $20. Prices soar as others assume you are on to something, then you dump all of them at $16. Profit $2 million)

Investigators at the U.S. Federal Energy Regulatory Commission (FERC) give the real life example of Ryan Smith, a Barclays trader who exchanged instant messages with another trader on February 8, 2007, about a large position in electricity indices which he dumped at a loss to make a profit with a different investment.

setcjake: you blow your index load yet?smittybarcap: not yet. why?setcjake: watching to see how low the hr’s can getsetcjake: its like that battle sceen from Braveheart: hold…hold…unleash hell!smittybarcap: ha.setcjake: with no load/low volume, a hvy handed index dump really moves it

“Respondents not only engaged in this manipulative scheme at four trading nodes in the western United States during the Manipulation Months, but that they did so with the intent to commit fraud,” FERC officials wrote in a judgement handed down last week, six years after the trading took place.

“We intend to vigorously defend the firm and the employees in this matter,” said Kristin Lemkau, a spokeswoman for the JP Morgan Chase told the newspaper back in May. “We strongly dispute that Blythe Masters or any employee lied or acted inappropriately in this matter.”

Sudden changes in electricity prices tend to get noticed through by angry consumers. It’s much easier to get away with subtly raising prices on commodities like aluminum which consumers don’t buy directly. But anybody who buys canned fizzy drinks like Coke or Pepsi pays a fraction of a penny more without realizing it.

Here’s how that works: In 2010 Goldman Sachs, another Wall Street bank, has allegedly worked out a way to manipulate the prices of the metal by buying up the major warehouses where national stocks of the refined metal are stored in Detroit. The bank then deliberately moves the physical metal from one building to the next to delay their sale and push up prices as well as the cost of storing the aluminum. Experts estimate that the hidden cost to the consumer at $5 billion over the last three years.

“It’s a totally artificial cost,” Jorge Vazquez, managing director at Harbor Aluminum Intelligence, a commodities consulting firm, told the New York Times. “It’s a drag on the economy. Everyone pays for it.”

Goldman is not the only bank to do this. A mystery buyer recently started buying large quantities of copper till it had as much as half of the copper available in the market stockpiled, causing prices to spike. The buyer was eventually identified: JP Morgan Chase.

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